Commentary on how China and the world are adapting to each other -- or not.

May 2010

May 25, 2010

Indigenous Innovation: an oxymoron or a critical link in helping Chinese industry move up the value-added chain? If last year was all about the exchange rate (and this hasn't disappeared), Indigenous Innovation is definitely the hot issue of the year in China's foreign economic relations.

It's not that it is new. China has long had an activist policy to develop technology, civilian and military. What's new is the degree of intensity and simultaneous use of multiple tools -- technical standards which privilege local technology, patent rules for national standards which allow use of proprietary technology for free and without the owner's consent when that technology is vital to developing the standard, an indigenous innovation catalogue, required disclosure of sensitive technology for information security products sold to the PRC government, and more generally reserving government procurement for local technology.

All of this has the international business community and their home governments up in a tizzy. American, European, Japanese, and South Korean industry are all on the same page and cooperating. We are also seeing a rise in media coverage of the continuing obstacles to innovation in China. Don Lee wrote a couple weeks ago in the LA Times about the frustrations of an MIT professor turned lithium-ion battery entrepreneur who set up factories in China only to see similar technology soon emerge out of other factories. They would hire good talent, but, as their CTO said, "we ended up having to teach these guys how to make our state-of-the-art, world-class batteries. … And some of them are now competing with us directly." John Pomfret has a long piece in today's Washington Post arguing that China lacks famous global brands because of the obstacles to innovation. Lenovo, China's most recognizable brand which bought IBM's PC division in 2004, has only achieved success by re-focusing on the Chinese market. If Geely's acquisition of Volvo is to pay off, it will need to do the same -- go local not global.

The underlying message is loud and clear: China is not only not playing fair with the international community, it is shooting itself in the foot. Hyper techno-nationalism is actually likely to hinder innovation and hurt the chances of Chinese industry moving up the value-added chain.

I am sympathetic to this perspective, but I do worry that it may be going a bit overboard. After watching Chinese technology policy for the last decade and a half, there seem to be some consistent themes and points I see:

1. China is doing very well without famous global brands. I was going to say, "because it has no global brands," but that's a little too strong. Nevertheless, China's comparative advantage is in assembly and manufacturing, because of a highly educated labor force and government investments in infrastructure and policies encouraging partnerships between China and the rest of the world. 10% annual GDP growth for 30 years is proof enough that despite a variety of mistakes, the Chinese basically have gotten it right. You have to crawl before you walk and walk before you run, and the Chinese have been excellent crawlers and walkers. Chinese should not obsess about not having lots of famous brands.

2. You can find lots of stories of obstacles to innovation, stolen IPR, etc., but it's wrong to say innovation is absent in China. Process innovation related to manufacturing abounds, and there have been a slew of incremental product and service innovations. Dan Breznitz and Michael Murphee's soon to be released, Run of the Red Queen: Government, Innovation, Globalization, and Economic Growth in China (Yale University Press) documents regional patterns of innovation, with a variety of real-world examples. A larger point is that innovation is not simply a bottom-up, government-get-out-of-way process. There is a role for government, even an activist role, though the exact contours of what works and what doesn't, what's fair and what isn't, is not clear.

3. As distasteful as many of China's indigenous innovation policies are, it's far from apparent that they violate China's international commitments, to the WTO or to individual trading partners. China has mastered how to get right up to the line without breaking the letter of the law. Take standards. I have a hard time envisioning a standards case at the WTO. There have been around 400 disputes brought to Geneva, and exactly one has involved standards -- for sardines, not your typical high-tech product.

4. One reason bringing a case would be hard is that announced policies and rules are typically scaled back, either during the drafting process, which is more accessible than in the past, or early in implementation once obvious, major problems emerge. Mandatory implementation of WAPI was suspended in 2004. Green Dam was busted in 2009. Over the last year the mandate for turning over sensitive technology for cetain Info Security products was scaled back to a narrower group of products and only applied to those provided in government procurement. WAPI has been resuscitated, but it now shares space on mobile technology with WiFi, an extra burden for consumers and manufacturers, but not the ban on WiFi originally planned.

5. The scaling back and revision of plans is due to both the patient and well organized lobbying of multinationals and the quiet lobbying and popular criticism leveled against these policies by Chinese industry and the public. Internationally oriented companies and consumers who want the best technology regardless of its national origins have gotten quite uppity about techno-nationalist policies that go against their interests. They are more open to a techno-globalist view of Indigenous Innovation that stresses innovation, in which promoting innovation in general is good for local and foreign industry.

The short of it all is that it makes little sense to attack Indigenous Innovation head on as an inherent oxymoron. It has potential for great harm and great good. Engagement with the Chinese government and other stakeholders on a case-by-case basis is the way to go. That means lots of little battles, but it makes more sense than going nuclear.